Bank of Baroda will be able to maintain or even improve its net interest margin (NIM) going ahead due to structural changes that will work in the bank’s favour, says managing director and chief executive officer Sanjiv Chadha. A higher proportion of retail loans within the overall portfolio will hold the bank in good stead even as the benefit of loan re-pricing is largely behind the banking industry, he tells Ajay Ramanathan. Edited excerpts:
Will home loan demand be impacted due to high interest rates?
As a general proposition, I would believe that the growth that we have seen in loans this year could in part, be due to repressed demand. So there could be a correction there. As far as home loans are concerned and our growth, I think it is something that has got to do with what we have been able to put in place for the last few years. If fact, this was one segment that was lagging for us. It was not far away from the market, but the kind of share that you want was not there. So we have now put in place a multi-channel strategy which is not only dependent on branches. That is working very well. Also, bob World and digital has emerged as a powerful access tool for us. A very large percentage of loans is now being sourced through bob World. That comparative advantage that we have acquired through new channels, through digital is likely to continue. I am fairly confident that even as we go forward, we will continue to gain market share and have growth that is better than industry in home loans and in retail in particular.
How do you see the credit card business BoB Financial Solutions shaping up?
That is a business that is getting good traction. That is because we have largely been able to use the network of Bank of Baroda much more effectively and increasingly, we are able to use bob World to get credit card customers. That traction is likely to continue. We however recognise that it is a relatively small player, although growing very fast at more than 50% a year. Therefore if there is possibility of us tying up with someone who has a complementary distribution channel, then that is something that we might consider. We have been running a process informally over the last few months. We have received a fair bit of interest. Over the next few weeks, we would be actually formalising that to make sure that we try to access the best possible partnership to give this business momentum. It could be a fund which has international experience in such businesses. It could be a technology firm, it could also be a player with a large distribution network. So we are looking at all possibilities. It is clear to us that it is not the capital that we need. We are very well capitalised. It is a relatively small business. You do want to make sure that the progress that we have made can be sustained and accelerated further. This is only possible if you get a good partner on board.
There is now a higher incidence of people converting their CASA deposits into term deposits. How does this impact your balance sheet?
You could argue that the assets and liability risk diminishes as a demand deposit can be withdrawn anytime while a term deposit is by definition, for a specific term. It does have an impact on margins because you tend to pay more for a term deposit when compared to a savings deposit. But, this is a normal part of the cycle. Also, if the banking industry wants to attract its fair share of deposits, you do need to pay positive real rates. Today, in a lot of categories, the rates have become positive, which means that they are higher than the inflation rate. To that extent, I think it should help us in terms of assets and liability management and accelerating the pace of growth, and banks reclaiming some of the deposits that may have gone to other channels because rates were very low.
What is your guidance on NIM?
Our NIM is currently at around 3.37% for the quarter, about 3.25% for the year so far. I think we should be able to sustain NIM, may be even improve them as we go forward. This is for a few reasons. It is true that the lag effect and benefit of that in terms of re-pricing is largely behind us. But going ahead, I think there are some structural changes that will work in Bank of Baroda’s favour. One is that is we have seen a significant change in the proportion of retail loans every quarter. This quarter, you would have noticed that the organic retail loan growth is as high as 30%, which is 1.5 times our loan growth. This is our stance. That we would want to grow higher than industry but make sure than retail loan growth is 1.5 time our loan growth so the proportion of retail increases. That should have an impact on our margins. The second thing is that although the deposit rates are now catching up, 50% of our book is corporate and linked to marginal cost of funds-based lending rate (MCLR). The one-year MCLR benefit flows over a period of time, actually over a one-year time because it is only then that your entire book gets re-priced so that is helping us. Third, that even today, there may be some limitations to pricing when it comes to top rated corporates. There could be some improvement there going ahead as liquidity normalises and the lag in deposit growth gets manifested in terms of the choices that banks make in terms of asset underwriting. There are a lot of factors, some structural, some specific to Bank of Baroda, some general which should indicate that margins should be sustained as we go forward.
What are your predictions for the upcoming monetary policy?
I think we are pretty much towards the end of the interest rate hike cycle. Maybe, one rate rise and probably again a pause. The central bank may then see how things progress. The external environment is also moving in a similar direction, because otherwise pressure does emanate from other central banks’ action and the impact that it has on currency. I think inflation again seems to be getting under control. So for a variety of reasons, I think we can be fairly positive that the rate increase that we have seen is now largely behind us. The good part is that at the end of the cycle, we are not very far away from where we were two-to-three years ago. This means that interest rates have only normalised, they have not come to any kind of peak. Therefore, any disruptive impact that interest rates could have had, which is likely in economies where interest rates are 30-year highs is not likely to be there in India. So we should be able to absorb these interest rate increases and continue with our growth story.
What is the process that you are adopting with regard to the Nainital Bank stake sale? What is the criteria that you are looking at for buyers?
We have a statutory obligation and a regulatory obligation which is there. No bank can hold more than 25-30% in another bank. We have been holding this stake for more than 40 years now. Therefore, this is an untenable position as per the Banking Regulation Act. As far as the process is concerned, we want to make sure that we do remain a significant shareholder for some time. That would be important both for regulatory comfort and also a smooth transition. We have made a lot of investments in technology, so I think the bank would have a great future with the right sponsors, including Bank of Baroda. Even as we speak for ourselves, Bank of Baroda has been benefitted from the digital revolution. Therefore, scale has become less important. There was a time when you could have argued that there is no space for a small bank. Today, there is space for a small bank that is digitally savvy. With the right sponsors and the right support, it can actually do very well. We would want to run a process where we tracked interest from the right kind of partners and make sure that the bank has a bright future going ahead. It will be a transparent process and something that should yield us results in terms of getting a partner or partners who are able to meet the criteria of the Reserve Bank of India in terms of ‘fit and proper’, and who can contribute to the onward journey of Nainital Bank. It is still early days but I think we have got very good interest. I do believe that we should make good progress with what we are trying to do.
Will there be a reluctance among banks to lend to large conglomerates in the wake of the Adani group saga?
We can only speak for ourselves. We have been very conscious that the corporate segment is a great segment when the going is good but there is also concentration risk which comes from that. That is something that you need to manage. If you can help it, you should try to have a more diversified portfolio. Every quarter, our proportion of retail loans is growing. It is our stated position that we would want to grow at market or better. But retail growth should be 1.5 times that, and corporate only 0.7 times that. That has meant that since we are not chasing loan growth on the corporate side, we are able to choose exposures. We are able to make sure that it is diversified. Therefore, today you would find that our exposure is very diversified as a consequence of the fact that we are not chasing corporate loan growth. To the case in point of the group that you talked of, it does not figure in the top 15 groups for the banks when measured by way of the Reserve Bank of India’s large exposure framework. What you can lend to any group, our exposure to this group is only one-fourth of that. Nearly a third of this exposure is in joint venture with public sector companies or guaranteed by the public sector. As far as Bank of Baroda is concerned, I am fully assured that the improvement that you have seen in the bank’s performance in terms of credit cost, credit growth and return on equity is going to be unimpaired and will continue. As far as this group is concerned, we have a successful operating companies in a diverse range of industries, all of which, work to different cycles. I think there is very little to worry about. Also, we underwrite loans on the basis of book value. The movement in the share prices does not alter the book value even by a single paisa. Your leverage ratio remains constant, your asset price remains constant, and your cash flow remains constant. So, there is no reason to suppose that this can be any reason for discomfort.